Truth to tell, I’m a little nervous in participating in this discussion with Dr. Gerry Sicat’s fine book entitled: Weighing in: The Philippine Economy and Social Progress as a take-off point. Not only am I nervous because I’m a dropout in UP’s Masters in Economics program, but also, I look up to Dr. Gerry and consider him as a sort of mentor. Although I never studied under Gerry, I consider myself his avid student, having used his books, namely his book with John Powers on trade and industry and his book Economic Policy and Development, to learn about macroeconomics in the Philippine setting.
Although I was a staunch anti-Marcos activist in the seventies, I remember that Dr Gerry, together with former Prime Minister Cesar Virata, carved out islands of excellence in the Marcos administration, especially during its early years. If I remember correctly, Dr. Sicat pushed for Export Processing Zones as a way to make an end run against the then inward-looking, protectionist economy, and to test his ideas about bringing in much needed foreign investments and technological know-how into the country. The export processing zones has been an unqualified success.
Indeed, Dr. Sicat has extensive experience not only in the Philippines when he served as the first NEDA Secretary General, but in the World Bank, where his work took him to many countries in Asia, Africa, and Western Europe. Therefore, what he writes in his columns and in his book is the fruit of his many years of experience. It would be a pity if the PNoy administration chooses to ignore the sage advice given in his insightful columns and in this book.
In the book, Dr. Sicat has done a service to avid students of Philippine economy: he has zeroed in on two principal binding constraints to sustained growth in employment and economic output, namely: the unrealistic price of minimum wages that has deterred job growth and the foreign ownership restrictions in the Constitution, a view that the Foundation for Economic Freedom shares. By the way, these binding constraints can be traced to American rule: Dr. Sicat traces the restrictive foreign ownership provisions to the 1935 Constitution and the minimum wage to the Bell Mission in the fifties. Perhaps this is a validation of the theory of path dependence.
It would be well for the administration to listen to Dr. Sicat. Good governance and inclusive growth mean nothing if investments don’t come in and create jobs. Unless these binding constraints are lifted by the creation of employment zones where labor flexibility will be the rule and the Constitution is changed to remove foreign restrictions in ownership, sustainable levels of high growth together with massive reduction in poverty are not possible.
If I have to add anything to the views of Dr. Sicat, it would be that we need to include agriculture into the equation. We need to radically revise our present rural development policies if we are to lift out of poverty the millions of poor the majority of whom live in the countryside. The NFA monopoly on rice importation, the rice-self sufficiency policy, the wastage of resources for a single crop – rice – at the expense of other high value-added agricultural commodities, the spending of agricultural resources for overpriced or ghost fertilizers rather than research and development, the total log ban policy, a land reform program that hasn’t increased productivity but merely driven private capital investments out of agriculture, an exchange rate that’s biased against high domestic value-added activities like agriculture, etc. – all of these need to be radically reviewed and revised.
We have to include agriculture in our reform agenda not only because it provides inputs to industry and the rural sector serves as a market for industrial goods, but also because the current high price and instability of food prices affect our ability to convince labor to accept flexibility in labor laws.
Unfortunately, we know that politics is the problem. In the case of high minimum wages, we know that organized labor is not the only opposition. In actuality, the domestic monopolists don’t want to see labor rule flexibility because not only does monopoly rent allow them to pay their workers the unrealistic high wages, but that the minimum wages serves as a deterrent to new, competitive entrants.
We therefore have an unholy trinity of organized labor, domestic monopolists, and politicians conspiring to keep the status quo of unrealistic wage rates and rigid labor policies that keep the unemployed and voiceless poor from getting jobs.
Or to take another example, the so-called rice-self sufficiency policy, a pa-pogi policy of the administration. Rice self-sufficiency is a good soundbite but in actuality, the policy only serves the interests of the NFA monopoly and the politicians who control it, the favored businessmen who are given prized Minimum Access Value licenses, and the smugglers who take advantage of the huge differential between the world price and the domestic price of rice. In the end, a rice-self sufficiency policy keeps rice prices high just so the PNoy administration can claim self-sufficiency by dampening demand. But it will also keep wages high and increase the agitation for ever higher wages because workers get most of their calories from rice. We economists must tell PNoy to stop his pa-pogi policy, which just lines the pockets of corrupt politicians and bureaucrats, and to use free trade to give our people lower food prices , dampen the demand for ever higher wage rates, and make the economy more competitive.
In sum, we economists must increasingly engage in politics because the ultimate binding constraint is politics. This isn’t economic imperialism, just political economy. Why all these populist measures now – for example, the MWSS, now chaired by a classmate of President Aquino, just ordered Manila Water and Maynilad Water to reduce their water rates and jeopardize the most successful PPP in the Philippines? Or why did the administration suddenly increase minimum wages? It’s not coincidental that these populist measures were adopted at a time of great popular anger against politicians and the pork barrel system.
Let us also not forget that former President Gloria Arroyo, a doctor of economics from this hallowed institution, adopted economically disastrous, but populist measures like freezing the rates of NAPOCOR, because our flawed electoral system allegedly allowed her to cheat. Without a clear political mandate, she had to resort to these economically disastrous policies and corrupt practices to enable her to keep her rule. Let us also not forget that the Ampatuans were coddled and supported because Maguindanao is the cheating capital of the Philippines. No wonder Maguindanao remains one of the country’s poorest provinces.
We economists therefore must talk about political reforms in the same breath as economic reforms. Take this pork barrel controversy for example. How can one talk about tax reforms and getting the tax to GDP ratio high enough to finance education and infrastructure when there’s rampant stealing of the public coffers? When the “tong-pats” is not just 10% or 20% in the good old days, but 100%?
But we know that abolishing the pork barrel system isn’t the solution. In this age when running for public office requires millions, if not billions in pesos, there’s a great incentive for our politicians to steal or to sell their legislative decisions to the highest bidder. Should we not, as economists, start talking about the need for a true political party system to increase public accountability and for state financing of political parties and electoral campaigns? Should we not as economists also talk about the need to dismantle private armies, to reduce the prevalence of political dynasties and improve political access, to improve the computerized voting system, to professionalize the bureaucracy, and other political reforms?
However, while there’s a negative feedback loop between politics and economics, there’s also a positive feedback loop. The economic reforms that Dr. Sicat talks about – removing the foreign ownership restrictions in the Constitution and creating employment zones – will increase the demand for good governance. If legitimate foreign investors come in here because the restrictive foreign ownership provisions in the Constitution are removed, there will be increased demand for good governance and a more coherent political system. Businessmen can’t plan if the political system isn’t stable and prone to populist measures and factional wheeling and dealing. The poor, once gainfully employed, will become less dependent on political patronage and demand more from their elected public officials as taxpayers.
Dr. Sicat rightly includes Social Progress in the title of his book. We economists can’t just use GDP as the sole metric of success. We must work for our progress as a society. Part of that progress is citizen empowerment and getting our elected leaders to work for the public good, rather than their own selfish interest. In short, public morality.
Let me congratulate Dr. Gerry Sicat once again for his excellent book. And I would like to thank him for honoring me with the invitation to speak in this distinguished forum.